Linux to benefit from law in China

Linux to benefit from law in China

http://www.palmbeachpost.com/business/content/auto/epaper/editions/sunday/business_0425c844b14f50c80075.html

By Julie Chao, Palm Beach Post-Cox News Service
Sunday, March 14, 2004

BEIJING -- For years, China has been trying to end Microsoft
Corp.'s monopoly on its computers. It has tried to develop
its own operating system. It has appealed to the patriotism
of consumers.

Now, it is turning to the law.

Officials say a new law will be announced by this summer
requiring a minimum percentage of software purchased by the
government be produced in China. That's crucial in a country
where the government accounts for 25 percent of the $30
billion software market.

No one is saying what that minimum will be -- some say it
may be as high as 70 percent -- but one thing is certain:
Linux will be the beneficiary.

"When the government purchasing law comes out, Linux will
win a piece of the market," said Fang Xingdong, chairman of
China Laboratory, an independent software consulting firm.
"Of course, the party that will be most affected will be
Microsoft."

Microsoft did not respond to requests for comment. But the
company has been actively trying to woo China. Chief
Executive Officer Steve Ballmer visited the country in
November and signed an agreement with the Ministry of
Education to provide $10 million to promote computer use in
schools.

China says it is merely trying to level the playing field
for its own software companies.

"If a software program is dominant for a long time, it's
harmful for the development of the software industry," said
Li Wuqiang of the Ministry of Science and Technology.

China's reasons for preferring Linux are many. Officials
often say they feel safer with an open source operating
system, because a proprietary system such as Microsoft's
Windows may contain hidden "back doors" that programmers can
use to evade security and gain access. Microsoft tried to
alleviate that concern last year by revealing its Windows
source code to the government, as it has done with some
other governments and universities.

Another big factor is cost. The Linux operating system is
essentially free, while Windows is considered unreasonably
expensive.

"I believe the era of exorbitant profit for software should
end," said Li, the science ministry's deputy director in
charge of new technology. "Basic software services should be
cheap, just like water, electricity and gas."

But the primary reason, one that is repeated by officials
and in the media, is a nationalistic one. China believes
that by developing its own operating system, it will have
control over its destiny.

"An operating system determines the fate of the IT industry
in a country," Lu Shouqun, a former government official who
now advises several software companies, told the state-run
Guangming Daily.

It's no secret that China's goal is to have an
internationally competitive software industry. Linux, it
believes, may be the key to achieving that.

Over the years, China has been handing out grants to almost
any company working on a Linux product. According to Fang,
the Ministry of Science and Technology will invest more than
$60 million by 2005 and the Ministry of Information Industry
more than $12 million on all types of software.

So far, Linux has not made big inroads. IDC software analyst
Jenny Jin estimates it has "a very small percentage" of the
operating system market, probably less than 4 percent. It is
far more common on servers than on desktops, with 20 percent
of businesses having at least one server running Linux,
according to Gartner Inc., a market research firm.

China lags the rest of Asia, which is increasingly turning
to Linux. On average, 42 percent of businesses in the
Asia-Pacific region have at least one Linux server, says
Gartner. However, China's Linux market is expected to expand
quickly, with a compound annual growth rate of about 40
percent from 2002 to 2007, according to Jin.

While the software-purchasing law will apply only to the
government sector, software makers see the market as nearly
unlimited. Plus, once government agencies switch, it "will
lead the way for enterprises and consumers to use domestic
products," said Fang.

But Microsoft's bottom line will not be immediately affected
by the new law. For one thing, its customers consist mainly
of big enterprises, Fang said. The government market is
relatively new and doesn't always pay full licensing fees,
in a country where piracy is rampant.

Furthermore, it will take another year or two before Linux
applications can compete with those for Windows, Fang said.

The law will not mean all foreign companies will be shut
out. China's concept of "locally produced" will embrace
anything developed here by multinational companies. This
definition allows China to not only gain access to foreign
technology, but also have a generation of its own engineers
trained by foreign companies.

"If a foreign company puts its R&D in China, this can count
as local, but they have to really be doing R&D in China, not
just sales," said Li, the government official.

Sun Microsystems' lab in Beijing partly developed and
localized a desktop Linux system, then handed it over to
government-backed China Standard Software Co. of Shanghai.

"It's like Mercedes coming to China and saying, 'Here are
the specs of the car, here's a truckload of cars, here's the
entire factory equipment, and this is how you make the car,
and now it's yours. You can change the Mercedes name to
whatever, or if you want to improve it, go ahead,' " said
Gong Li, the lab's general manager.

Sun won't make much money on the deal, but it has helped
with sales of Sun's hardware in China, according to reports
in the state-run media.

China's domestic Linux players, of course, will reap the
most benefits from the new law. Red Flag was one of the
earliest developers and, with financial support from the
government, gained about 29 percent of the market in 2002,
according to IDC. Yet its CEO and president quit last
December amid reports the company was losing money and
contract bids.

Qin Yong, China Standard vice-general manager, said his
company should have no problem achieving its aim of becoming
China's largest Linux company within two years, but admits
the company will still need a couple of years more of
government support.

"In three to five years, assuming normal development,
Chinese software, or at least Linux, will be able to stand
up and compete with international companies," he said.

jchao@coxnews.com

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